March 9th, 2010 12:09 PM by Lehel S.
Home ownership in the United States ranks up there with apple pie and motherhood. The government has championed it for decades, through tax breaks, mortgage guarantees and most recently the Herculean task of keeping Americans in their homes after the housing market collapse. But government subsidies of the American Dream also have a darker side: when things head south, taxpayers end up on the hook.
Government-run mortgage agencies Fannie Mae and Freddie Mac owned more than 131,000 properties between them at the end of 2009, according to recent annual filings. That’s roughly the equivalent of San Francisco’s owner-occupied housing stock — and it’s up substantially from 2008, despite the two giant companies’ efforts last year offloading nearly 200,000 units that they ended up with after their previous owners defaulted.
And things are set to get worse. Barclays Capital estimates the pipeline of severely troubled loans at around 5 million across the United States. Modification programs, which should help some borrowers stay in their homes, have also delayed the inevitable forfeiture of many others.
Fannie and Freddie are on the hook because they provided guarantees for the benefit of mortgage investors. Between them, they back around $5 trillion of U.S. home loans. Such support — once implicitly and now explicitly backstopped by the Treasury — has handed borrowers relatively low financing costs for years. Now, though, the result is that aside from the huge financial burden they place on taxpayers, the two companies have been amassing foreclosed properties and, in a few cases, have become landlords.
It’s a tiny part of their operations for now. But if the housing market doesn’t turn around soon, they could find themselves reluctantly managing more properties. And no-one expected — or wants — Fannie and Freddie to become giant public sector landlords.
The immediate task is to clean up the mess, but policymakers need to think about the longer term. That means recognizing that the policy benefit of subsidizing home ownership has reached its limit — and starting to take the government out of the mortgage guarantee business altogether.